What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-26 compared with 2020-08-31 · 167 added, 282 removed, 257 unchanged (64% of the section changed)

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Regis Corporation (RGS) franchises, owns and operates beauty salons.

As of June 30, 2020, the Company franchised, owned or held ownership interests in 6,923 worldwide locations.

Our locations consisted of 6,841 system-wide North American and International salons, and in 82 locations we maintain a non-controlling ownership interest less than 100 percent.

As of June 30, 2021, the Company franchised, owned or held ownership interests in 5,917 locations worldwide.

Our locations consisted of 5,839 system-wide North American and International salons, and in 78 locations where we maintain a non-controlling ownership interest.

Each of the Company's salon concepts generally offer similar salon products and services.

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In the second quarter of fiscal year 2020, TBG transferred 207 of its North American salons to the Company.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K, as the results of operations for the mall-based business and International segment are accounted for as a discontinued operation for all periods presented.

In January 2018, the Company closed 597 non-performing company-owned SmartStyle salons.

The 597 non-performing salons generated negative cash flow of approximately $15 million during the twelve months ended September 30, 2017.

The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth.

A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows:

Financial Line Item Fiscal Year 2018

(Dollars in thousands)

Inventory reserves Cost of Service $ 656

Inventory reserves Cost of Product 586

Severance General and administrative 897

Long-lived fixed asset impairment Depreciation and amortization 5,460

Asset retirement obligation Depreciation and amortization 7,680

Lease termination and other related closure costs Rent 27,290

Deferred rent Rent (3,291)

Total $ 39,278

In addition, the Company recorded approximately $1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs.

Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018.

The overall goal of the TBG transaction was to reduce the Company's exposure to the mall-based lease obligations.

As of June 30, 2021, we have 43 TBG salons and remaining lease liability of $9 million.

As part of the Company's strategic transition to a fully-franchised model, the Company is selling salons to franchisees.

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Cash proceeds received $ 8,437 $ 91,616 $ 94,787 $ (83,179) $ (3,171)

Gain on sale of venditions, excluding goodwill derecognition $ 49,660 $ 69,973 $ 4,140 $ (20,313) $ 65,833

(Loss) gain on venditions, excluding goodwill derecognition $ (16,696) $ 49,660 $ 69,973 $ (66,356) $ (20,313)

Non-cash goodwill derecognition — (76,966) (67,055) 76,966 (9,911)

(Loss) gain from sale of salon assets to franchisees, net $ (16,696) $ (27,306) $ 2,918 $ 10,610 $ (30,224)

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(1) Fiscal year 2018 includes the mall salons transferred to The Beautiful Group for no proceeds.

The Company is also exiting its wholesale distribution business as part of its asset-light transformation.

The Company will exit its distribution centers and cease selling products to franchisees in fiscal year 2022.

Instead, franchisees will source product from third party distribution partners and the Company will receive a royalty payment based on franchisee purchases.

Going forward, this change will significantly decrease both the Company's Franchise product revenue and general and administrative costs, including the Franchise distribution costs discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

In fiscal year 2021, the Company experienced the following one-time charges related to the plan to exit the distribution centers:

Financial Statement Caption Segment (in thousands)

Inventory reserve (Note 1) Cost of product Company-owned $ 12,068

Gain from disposal of distribution center assets (Note 8) Interest income and other, net Corporate (14,997)

RESULTS OF OPERATIONS

The Company reports its operations in two operating segments:

Franchise salons and Company-owned salons, effective October 2017.

The Company's operating segments are its reportable operating segments.

Prior to this change, the Company had four operating segments:

North American Value, North American Premium, North American Franchise and International.

Beginning with the period ended September 30, 2017, the mall-based business and International segment were accounted for as discontinued operations for all periods presented.

Discontinued operations are discussed at the end of this section.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further discussion on this transaction.

The Company realigned its field leadership team beginning in the first quarter of fiscal year 2018.

An outcome of this reorganization is that the costs associated with senior district leaders were moved out of cost of goods sold and site operating expense and into G&A.

This change affected one month of comparability during the fiscal year ended June 30, 2018.

The estimated impact of the field reorganization (decreased) increased Cost of Service, Site Operating expense and General and Administrative expense by $(2.4), $(0.4) and $2.8 million, respectively, for fiscal year 2018.

This expense classification does not have a financial impact on the Company's reported operating loss, reported net (loss) income or cash flows from operations.

Franchise salons and Company-owned salons.

In fiscal year 2019, the mall-based business and International segment were accounted for as discontinued operations.

COVID-19 Impact:

During the second half of fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on our operations, including the closure of all company-owned salons and almost all franchise locations from March 2020 due to government mandates.

Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased.

As of June 30, 2020, approximately 87% of franchise salons were open.

Company-owned salons were closed through May 21, 2020 and are gradually re-opening.

As of June 30, 2020, approximately 54% of company-owned salons were open.

As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety.

As a result, COVID-19 has and will continue to negatively affect revenue and profitability.

To offset the loss of revenue, in April 2020, we implemented a furlough program for a majority of the workforce across the corporate office, field support, and distribution centers;

During fiscal year 2021 and the second half of fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on our operations.

Nearly all salons were closed for some time during April 2020 with franchise salons gradually starting to open near the end of April.

Company-owned salons began opening in June 2020 and our salons did not experience significant mandated closures during the remainder of the year, with the exception of California and Canada.

California and Canada had significant mandated closures throughout fiscal year 2021, predominantly in the second half of the year.

To offset the loss of revenue, in April 2020, a furlough program was implemented for a majority of the workforce across the corporate headquarters, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

The furlough program was in effect for the majority of the fiscal fourth quarter.

Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

The economic disruption due to COVID-19 was determined to be a triggering event and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment.

See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further discussion on the pandemic.

The furlough program was in effect for the majority of the fourth quarter of fiscal year 2020 and was gradually lifted in the first quarter of fiscal year 2021.

Despite actions taken to resume business operations, COVID-19 and the volatile regional and global economic conditions stemming from the pandemic could potentially prolong and intensify the impact on our business.

System-wide results

As we transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

As an asset-light franchise platform, our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

While we do not record sales by franchisees as revenue, and such sales are not included in our Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance.

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Supercuts (25.8) (4.2) (0.2)

Signature Style (3.7) (0.8) 0.5

Total, excluding TBG mall-locations N/A (0.1) N/A

TBG mall-locations N/A (4.5) N/A

Portfolio Brands (24.8) (3.7) (0.8)

Total (25.8) % (4.4) % (0.1) %

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(1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year (including TBG mall locations in 2019) that were open on a specific day of the week during the current period and the corresponding prior period.

TBG salons were not a franchise locations in 2018 or 2020 so they are by definition excluded from same-store sales in 2018 and 2020.

(1) Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal years 2020 and 2019 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

Year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

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Franchise royalties and fees 88.1 73.4 93.8 21.2 11.0 8.8 1,020 220

Franchise rental income 127.2 — — 19.0 — — N/A N/A

Franchise rental income 127.4 127.2 — 30.7 19.0 — 1,170 N/A

Cost of service (2) 79.1 222.3 452.8 73.2 67.1 60.4 610 670

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Rent 40.9 76.4 131.8 9.9 11.4 12.3 (150) (90)

Franchise rent expense 127.2 — — 19.0 — — N/A N/A

Franchise rent expense 127.4 127.2 — 30.7 19.0 — 1,170 N/A

Depreciation and amortization 22.7 37.0 37.8 5.5 5.5 3.5 — 200

Long-lived asset impairment 22.6 — — 3.4 — — N/A N/A

Long-lived asset impairment 13.0 22.6 — 3.1 3.4 — (30) N/A

TBG restructuring — 2.3 21.8 — 0.3 2.0 (30) (170)

Goodwill impairment 40.2 — — 6.0 — — N/A N/A

Goodwill impairment — 40.2 — — 6.0 — (600) N/A

Operating loss (3) (104.2) (145.3) (22.1) (25.1) (21.7) (2.1) (340) (1,960)

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Income tax benefit (3) 5.4 4.6 2.1 4.6 2.6 9.6 N/A N/A

Income (loss) from discontinued operations, net of taxes 0.8 5.9 (53.2) 0.1 0.6 (4.3) (50) 490

Income from discontinued operations, net of taxes — 0.8 5.9 — 0.1 0.6 (10) (50)

Net loss (3) (113.3) (171.4) (14.2) (27.3) (25.6) (1.3) (170) (2,430)

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(2) Excludes depreciation and amortization expense.

(3) Total is a recalculation;

line items calculated individually may not sum to total due to rounding.

(4) Computed as a percent of loss from continuing operations before income taxes.

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Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees franchise royalties and fees and franchise rental income.

Consolidated revenues primarily include product and equipment sales to franchisees, franchise royalties and fees, franchise rental income and revenues of company-owned salons.

The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change.

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Supercuts 23,055 54,121 383,380

Signature Style 159,221 323,462 356,796

Portfolio Brands 71,253 159,221 323,462

Total, Company-owned salons 142,965 416,703 915,373

Company-owned salon same-store sales (decrease) increase (2) (4.4) % (0.4) % 0.4 %

Company-owned salon same-store sales decrease (2) (33.4) % (4.4) % (0.4) %

Consolidated revenues $ 415,113 $ 669,729 $ 1,069,039

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(1) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal year franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

(1) Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal years 2020 and 2019 franchise same-store sales are calculated as the total change in sales for franchise locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

Year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020.

(2) Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

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Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising fees and rental income.

Consolidated revenue decreased $399.3 million, or 37.4%.

Consolidated revenues are primarily comprised of service and product revenues, franchise royalties and fees, advertising fees and rental income.

Consolidated revenue decreased $254.6 million, or 38.0%, during fiscal year 2021.

Service revenue and product revenue decreased $223.4 million and $46.0 million, respectively.

The decline in service and product revenue is primarily the result of the Company's sale of salons to franchisees and the government-mandated salon closures in the fourth quarter.

The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees.

During fiscal year 2021, 747 salons were sold to franchisees, net of buy backs and 1,038 and 36 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes).

The impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $223.3 million.

Additionally, the decline in revenue was a result of the temporary closure of all franchise and company-owned salons in the fourth quarter due to the COVID-19 pandemic.

Royalties and fees decreased $20.4 million due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds.

Additionally, as a result of the Company's adoption of Topic 842, the Company now records revenue related to franchise leases and this adoption resulted in $127.2 million increase in franchise rental income for the year.

System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, which also contributed to the decline in service, product and royalties and fees revenue.

In fiscal year 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period.

Service Revenues

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The impact to service revenue due to the sale of salons to franchisees and closure of salons was $179.5 million.

Additionally, the temporary closure of salons in the fourth quarter and company-owned same-store service sales decreases also contributed to the decrease in service revenue.

The company-owned same-store service sales decrease of 3.3% during fiscal year 2020 was primarily due to a 7.4% decrease in same-store guest transactions, partially offset by an increase of 4.1% in average ticket price.

The remaining decrease in service revenue relates primarily to fewer guest visits as a result of the COVID-19 pandemic.

Product Revenues

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The impact to product revenue due to the sale of salons to franchisees and closure of salons was $43.8 million.

Company-owned same-store product sales decrease of 8.7% and the temporary closure of salons in the fourth quarter also contributed to the decrease in product sales.

For fiscal year 2020, the decrease in company-owned same-store product sales was the result of a decrease in company-owned same-store transactions of 12.8%, partially offset by an increase in average ticket price of 4.1%.

Additionally, franchise same-store product sales declined 25.3% contributing to the decline.

Royalties and Fees

The decrease of $20.4 million, or 21.7%, in royalties and fees for fiscal year 2020 was primarily due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds to provide temporary relief to our franchisees and the decline in royalties in the fourth quarter is due to government-mandated salon closures.

Royalties and fees increased $14.7 million, or 20.0%, during fiscal year 2021.

This increase was primarily due to an increase in cooperative advertising funds charged to franchisees of $8.7 million.

In fiscal year 2020, the Company refunded $14.9 million of previously collected cooperative advertising fund fees, which reduced royalties and fees in the prior period.

Cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales.

The declines in cooperative advertising are offset in site expense and have no impact on operating income.

Royalties and fees were also impacted by the decreases in franchise same-store sales of 24.5%, partially offset by an increase in franchise salons.

Total franchised locations open at June 30, 2021 were 5,563 as compared to 5,209 at June 30, 2020.

Franchise Rental Income

The increase of $127.2 million in franchise rental income is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

The increase of $0.2 million, or 0.1%, in franchise rental income during fiscal year 2021 is due to the increase in franchise salons.

Cost of Service

The 670 basis point increase in cost of service as a percent of service revenues during fiscal year 2020 was due to higher minimum wage and commissions and inefficient stylist hours.

The 610 basis point increase in cost of service as a percent of service revenues during fiscal year 2021 was primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits and higher minimum wages.

Cost of Product

The 450 basis point increase in cost of product as a percent of product revenue during fiscal year 2020 was primarily due to the shift into lower margin wholesale product sales.

Margins on retail product sales were 47.6% and 50.8% for fiscal years 2020 and 2019, respectively.

Margins on wholesale product sales were 23.6% and 21.2% for fiscal years 2020 and 2019, respectively.

The increase in wholesale product margins in fiscal year 2020 were primarily driven by lower sales to TBG.

The 2,500 basis point increase in cost of product as a percent of product revenue during fiscal year 2021 was primarily due to an $12.1 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy.

The shift from retail sales to franchise product sales also contributed to the basis point increase.

Excluding the excess and obsolescence reserve, margins on retail product sales were 40.7% and 47.6% for fiscal years 2021 and 2020, respectively.

Margins on franchise product sales were 18.1% and 23.6% for fiscal years 2021 and 2020, respectively.

The decrease in product margin is primarily due to lower prices in connection with the closing of company-owned salons and the Company exiting the wholesale distribution product business.

Site Operating Expenses

The decrease of $69.5 million, or 49.3%, in site operating expenses during fiscal year 2020 was due to a net reduction in company-owned salon counts, a decrease in cooperative advertising expense and a decrease in marketing spend.

Salons sold to franchisees and closed salons accounted for $37.8 million of the decline.

The Company records advertising expense as the contributions are received as it has an obligation to spend the funds to support the brands.

In fiscal year 2020, the Company refunde d $14.9 mill ion in advertising fees that were previously collected to provide temporary relief to our franchisees.

Marketing expense declined as part of our strategic shift to a full-franchised business model.

The decrease of $20.1 million, or 28.1%, in site operating expenses during fiscal year 2021 was primarily due to a net reduction in company-owned salon counts and decreases in marketing spend, partially offset by a $8.7 million increase in cooperative advertising expense, as noted above in Royalties and Fees.

General and Administrative

The decrease of $46.1 million, or 26.0%, in general and administrative during fiscal year 2020 was primarily due to lower administrative and field management salaries due in part to the Company's furlough program in response to the COVID-19 pandemic and reductions in headcount as we align our cost structure with our transition to an asset-light franchise model.

Stock compensation benefits associated with a change in performance awards assumptions also contributed to the decrease year over year.

The decrease of $55.4 million, or 42.1%, in rent expense during fiscal year 2020 was primarily due to the net reduction in salon counts associated with the Company's franchise strategy.

Additionally, two months of rent abatement from Walmart and a decline in percentage rent, both due to COVID-19 salon closures, also contributed to the decline, but were partially offset by rent inflation.

The decrease of $25.5 million, or 19.5%, in general and administrative during fiscal year 2021 was primarily due to lower administrative and field management salaries due to reductions in headcount as we aligned our cost structure with our transition to an asset-light franchise model.

A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in fiscal year 2021.

Additionally, $1.3 million of the decline is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

The decrease of $35.5 million, or 46.4%, in rent expense during fiscal year 2021 was primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio.

Franchise Rent Expense

The increase in franchise rent expense is due to the adoption of Topic 842 in fiscal year 2020.

Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

The increase of $0.2 million, or 0.1%, in franchise rent expense is due to the increase in franchise salons.

Depreciation and Amortization

The decrease of $0.9 million, or 2.4%, in depreciation and amortization during fiscal year 2020 was primarily due to the net reduction in company-owned salon counts, partially offset by an intangible asset impairment of $2.5 million.

The decrease of $14.2 million, or 38.5%, in depreciation and amortization during fiscal year 2021 was primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $3.9 million was recorded to depreciation expense in fiscal year 2020.

Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment.

Long-Lived Asset Impairment

In fiscal year 2021, the Company recorded a long-lived asset impairment charge of $13.0 million, which included a right of use asset impairment of $9.5 million and a salon asset impairment of $3.5 million.

In fiscal year 2020, the Company recorded a long-lived asset impairment charge of $22.6 million, which included a right of use asset impairment of $17.4 million.

Prior to the Adoption of ASC 842 in fiscal year 2020, we did not record a right of use asset so there was no impairment consideration.

Additionally, salon asset impairment increased in fiscal year 2020.

TBG Mall Restructuring

In fiscal year 2020, the Company incurred professional fees associated with acquiring salons from TBG.

In fiscal year 2019, the Company recorded a reserve against a note receivable of $8.0 million and accounts receivables of $12.7 million due from TBG primarily for inventory shipments.

In fiscal year 2020, the Company recorded $2.3 million of TBG restructuring charges, which related to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Goodwill Impairment

In fiscal year 2020, Company recorded $40.2 million of goodwill impairment related to the Company-owned reporting unit.

In fiscal year 2020, the Company recorded $40.2 million of goodwill impairment related to the Company-owned reporting unit.

The Company's forecasted cash flows for company-owned salons decreased significantly due to the impact of the COVID-19 pandemic.

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Interest Expense

The increase of $2.7 million in interest expense for fiscal year 2020 was primarily due to interest charges associated with the Company's long-term financing liabilities and the interest associated with the additional borrowing in fiscal year 2020.

(Loss)/Gain from sale of salon assets to franchisees, net

The increase of $6.3 million in interest expense for fiscal year 2021 was primarily due to greater levels of debt at higher interest rates.

Loss from Sale of Salon Assets to Franchisees, net

In fiscal year 2021, the loss from sale of salon assets to franchisees was $16.7 million.

In fiscal year 2020, the loss from sale of salon assets to franchisees was $27.3 million, including non-cash goodwill derecognition of $77.0 million.

In fiscal year 2019, the gain from sale of salon assets to franchisees was $2.9 million, including non-cash goodwill derecognition of $67.1 million.

The decrease year over year is due to lower proceeds per salon sold in fiscal year 2020 compared to fiscal year 2019 as the Company sold more Supercuts salons in fiscal year 2019, which typically vendition for greater proceeds than other concepts.

In fiscal year 2020, average proceeds per salon were $62.1 thousand compared to $123.6 thousand in fiscal year 2019.

There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment reported in fiscal year 2020.

Interest Income and Other, net

The increase of $1.6 million, or 93.9%, in interest income and other, net during fiscal year 2020 was primarily due to the gain on the sale of the Company's headquarters of $2.5 million, partially offset by a decline in interest income.

During fiscal year 2020, the Company recognized a tax benefit of $4.6 million, with a corresponding effective tax rate of 2.6% as compared to recognizing tax benefit of $2.1 million, with a corresponding effective tax rates of 9.6% during fiscal year 2019.

The increase of $12.5 million in interest income and other, net during fiscal year 2021 was primarily due to the gain associated with the leases for the Company's distribution centers (see Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K), partially offset by the sale of the Company's headquarters recorded in fiscal year 2020.

During fiscal year 2021, the Company recognized a tax benefit of $5.4 million, with a corresponding effective tax rate of 4.6%, compared to recognizing a tax benefit of $4.6 million, with a corresponding effective tax rate of 2.6% during fiscal year 2020.

See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income from Discontinued Operations

Income from discontinued operations decreased $5.1 million, or 85.9%, during fiscal year 2020, due to the lapping of income tax benefits associated with the wind-down and transfer of legal entities related to discontinued operations recognized in the second quarter of fiscal year 2019, partially offset by beneficial actuarial adjustments recognized in the current year.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Consolidated Revenues

Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees.

Service revenue decreased $149.7 million, or 16.6%, primarily due to the sale of salons to franchisees and a decline in company-owned same-store service sales of 0.3%.

The Company closed 133 company-owned salons, constructed (net of relocations) 10 company-owned salons and sold (net of buybacks) 735 company-owned salons during fiscal year 2019 (2019 Net Salon Count Changes).

Product revenue decreased $33.1 million or 12.8% due to lower sales to TBG and a system-wide decline of retail sales of 2.4% excluding TBG.

Partially offsetting these decreases was an increase in royalty and fee revenue of $16.4 million, or 21.1%, due to the net addition of 644 non-TBG franchisees during the year.

Service Revenues

The $149.7 million decrease in service revenues during fiscal year 2019 was primarily due to the 2019 Net Salon Count Changes and a decrease in company-owned same-store service sales of 0.3%, which was primarily a result of a 4.7% decrease in same-store guest visits, partially offset by a 4.4% increase in average ticket price.

Service revenues were also unfavorably impacted by a cumulative adjustment in the prior year related to discontinuing a piloted loyalty program that occurred in the prior year.

Product Revenues

The $33.1 million decrease in product revenues during fiscal year 2019 was primarily due to 2019 Net Salon Count Changes, a decline in product sold to TBG, the lapping of a one-time benefit related to discounted close-out product sales as part of the SmartStyle operational restructuring in the prior year and a decline in system-wide same-store product sales excluding TBG of 2.4%.

The decrease in system-wide same-store product sales excluding TBG was primarily a result of a 6.0% decrease in transactions, partially offset by an increase in average ticket price of 3.6%.

Royalties and Fees

The increase of $16.4 million in royalties and fees during fiscal year 2019 was primarily due to higher royalties and advertising fund revenue due to an increase of 644 non-TBG franchisees in fiscal year 2019 and an increase of 0.3% in same-store sales at franchised locations excluding TBG.

Cost of Service

The 140 basis point increase in cost of service as a percent of service revenues during fiscal year 2019 was primarily due to state minimum wage increases, a favorable shrink adjustment in the prior year and a one-time benefit from a settlement in fiscal year 2018.

Cost of Product

The 280 basis point increase in cost of product as a percent of product revenues during fiscal year 2019 was primarily due to higher discounting, the shift to lower margin wholesale product sales, favorable shrink adjustment in the prior year and a one-time benefit from a settlement in the prior year, partially offset by inventory reserves in the prior year related to the January 2018 SmartStyle portfolio restructure and lower franchise product sold to TBG.

Margins on retail product sales were 50.8% and 52.0% in fiscal years 2019 and 2018, respectively.

Margins on wholesale product sales were 21.2% and 21.6% in fiscal years 2019 and 2018, respectively.

Site Operating Expenses

Site operating expenses decreased $13.0 million during fiscal year 2019 due primarily to the 2019 Net Salon Count Changes, partially offset by higher advertising fund expense due to the increase in franchise salon counts, higher employment litigation reserves and higher contract maintenance, repairs and services costs related to open salons.

General and Administrative

General and administrative expense increased by $3.0 million during fiscal year 2019 primarily due to a n $8.0 million gain in the prior year associated with life insurance proceeds, increased stock compensation and professional fees, partially offset by lower administrative, corporate and field salaries and bonuses.

Rent expense decreased by $51.3 million during fiscal year 2019 primarily due to lease termination fees and other related closure costs associated with the January 2018 SmartStyle portfolio restructure and the 2019 Net Salon Count Changes, partially offset by rent inflation.

Depreciation and Amortization

Depreciation and amortization expense decreased $20.4 million during fiscal year 2019, primarily due to costs in the prior year associated with returning certain SmartStyle locations to their pre-occupancy condition in connection with the January 2018 SmartStyle restructuring and lower depreciation due to a reduced salon base and lower salon asset impairments.

TBG Mall Restructuring

In fiscal year 2019, the Company recorded a reserve against a note receivable o f $8.0 million and accounts receivables of $12.7 million due from TBG based on TBG’s inability to meet the requirements of the promissory notes, including non-payment of amounts due to the Company.

The $8.0 million note relates to prior year inventory shipments and the $12.7 m illion of receivables primarily relates to current year inventory shipments.

The remaining charge relates to reserves in connection with the settlement agreement with TBG in June 2019.

There were no related TBG mall restructuring charges in fiscal year 2018.

Interest Expense

Interest expe nse decreased b y $5.7 million during fiscal year 2019 primarily due to a lower outstanding principal and lower interest rates associated with the revolving credit facility compared to the retired senior term note and the lapping of the premium and unamortized debt discount expense associated with retirement of the senior term note in March 2018.

Gain from sale of salon assets to franchisees, net

In fiscal year 2019, the gain from sale of salon assets to franchisees was $2.9 million, including non-cash goodwill derecognition of 67.1 million.

In fiscal year 2018, the gain from the sale of salons assets to franchisees was $0.2 million, includi ng $3.9 million o f non-cash goodwill derecognition.

Interest Income and Other, net

The $3.5 million decrease in interest income and other, net during fiscal year 2019 was primarily due to prior year income from transition services related to TBG and the lapping of interest income associated with life insurance contracts settled in June 2018.

During fiscal year 2019, the Company recognized an income tax benefit of $2.1 million on $22.3 million of loss from continuing operations before income taxes as compared to recognizing income tax benefit of $69.8 million on $10.2 million of loss from continuing operations before income taxes during fiscal year 2018.

The recorded tax provision and effective tax rate for the twelve months ended June 30, 2019 were different than what would normally be expected primarily due to the deferred tax valuation allowance.

Additionally, the Company is currently paying taxes in Canada and certain states in which it has profitable entities.

See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income (Loss) from Discontinued Operations

Income from TBG discontinued operations was $5.9 million during fiscal year 2019 primarily due to tax benefits associated with the wind-down and transfer of legal entities.

During fiscal year 2018, the Company recognized $53.2 million of loss, net of taxes from TBG discontinued operations, primarily due to asset impairment charges based on the sale prices and the carrying values of the mall-based salon business and the International segment, the recognition of net loss of amounts previously classified within accumulated other comprehensive income, professional fees associated with the transactions and losses from operations.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income from discontinued operations was $0.8 million during fiscal year 2020 due to actuarial reserve adjustments.

Results of Operations by Segment

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Operating income $ 40.7 $ 35.2 $ 36.4 $ 5.5 $ (1.2)

Operating (loss) income from TBG (2.3) (20.2) 1.6 17.9 (21.9)

Operating loss from TBG — (2.3) (20.2) 2.3 17.9

Total operating income (2) $ 40.7 $ 32.9 $ 16.1 $ 7.8 $ 16.7

_______________________________________________________________________________

(1) Includes $1.6 million and $1.2 million of royalties related to TBG during the fiscal years 2019 and 2018, respectively.

(1) Includes $1.6 million of royalties related to TBG during fiscal year 2019.

(2) Total is a recalculation;

line items calculated individually may not sum to total due to rounding.

(3) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

(3) Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

Year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG salons were not a franchise location in fiscal years 2018 or 2020 so by definition they are not included in franchise same-store sales in 2018 or 2020.

TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal years 2018 and 2020.

Franchise same-store sales by concept are detailed in the table below:

2020 2019 2018

SmartStyle (9.7) % (5.6) % (3.0) %

Supercuts (4.0) % 0.8 % 2.1 %

Signature Style (3.5) % 0.1 % 2.1 %

Total (4.4) % 0.3 % 2.1 %

F same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

TBG same-store sales are excluded from fiscal year 2019 to be consistent with fiscal years 2020 and 2021.

Fiscal Year Ended June 30, 2021 Compared with Fiscal Year Ended June 30, 2020

Franchise Salon Revenues

Franchise salon revenues increased $99.4 million during fiscal year 2020, excluding franchise rental income recorded as a result of the adoption of Topic 842, franchise salon revenues decreased $27.8 million compared to the prior comparable period.

The decrease was due to the refund of previously collected contributions to the cooperative advertising funds, a waiver of fourth quarter advertising fees, as well as franchise product sales to TBG.

Royalties were flat year over year despite the increase in franchise salon count, due to the fourth quarter government-mandated salon closures.

Franchisees purchased (net of Company buybacks) 1,448 salons from the Company and constructed (net of relocations) and closed 47 and 237 franchise-owned salons, respectively.

Franchise salon revenues increased $19.1 million during fiscal year 2021.

The increase in franchise salon revenue was primarily due to increased cooperative fund contributions due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds.

Product revenue increased primarily due to the increase in franchise salons.

During fiscal year 2021, Franchisees purchased (net of Company buybacks) 747 salons from the Company and constructed (net of relocations) and closed 32 and 425 franchise-owned salons, respectively.

Franchise Salon Operating Income

During fiscal year 2021, Franchise salon operations generated operating income of $40.7 million, an increase of $7.8 million compared to the prior comparable period.

The increase was primarily due to the decrease in TBG mall restructuring costs.

Cash Generated from Salons Sold to Franchisees

During fiscal years 2020 and 2019, the Company generated $91.6 million and $94.8 million of cash respectively, from the sale of company-owned salons to franchisees.

The decrease is due to lower proceeds per salon sold partially offset by an increase in the number of salons sold.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Franchise Salon Revenues

Franchise salon revenues increased $22.6 million during fiscal year 2019 due to a $8.3 million increase in franchise product sales and a $16.4 million increase in royalties and fees as a result of higher franchise salons counts, partially offset by lower product sales to TBG.

Our franchisees constructed (net of relocations) 65 salons, purchased (net of Company buybacks) 735 salons from the Company and closed 156 salons (excluding TBG mall locations).

Franchise Salon Operating Income

Franchise salon operating income excluding TBG increased $2.4 million due to higher product and royalty revenue as a result of the increase in franchise salon count.

Franchise salon operating income including TBG, decreased $19.5 million during fiscal year 2019 due to the TBG restructuring charge of $21.8 million related primarily to notes and accounts receivable reserves.

The increase was primarily due to the increase in royalties per salon due to the net 747 salons purchased from the Company.

Cash Generated from Salons Sold to Franchisees

During fiscal years 2021 and 2020, the Company generated $8.4 million and $91.6 million of cash, respectively, from the sale of company-owned salons to franchisees.

The decrease is due to lower proceeds per salon sold due to diminished salon performance due to COVID-19 pandemic as well as the mix of salons sold.

Company-owned Salons

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Total revenue $ 143.0 $ 416.7 $ 915.4 $ (273.7) $ (498.7)

Company-owned same-store sales (4.4) % (0.4) % 0.4 % (400 bps) (80 bps)

Operating (loss) income $ (70.0) $ (96.1) $ 58.3 $ 26.1 $ (154.4)

Salon counts 1,632 3,108 3,966

2020 2019 2018

SmartStyle (4.4) % 1.5 % 0.3 %

Supercuts (5.3) % (2.3) % 1.7 %

Signature Style (4.0) % (1.3) % (0.2) %

Total (4.4) % (0.4) % 0.4 %

Total company-owned salons 276 1,632 3,108

Fiscal Year Ended June 30, 2021 Compared with Fiscal Year Ended June 30, 2020

Company-owned Salon Revenues

Company-owned salon revenues decreased $498.7 million in fiscal year 2020, primarily due to the closure of a net 250 salons and the sale of 1,448 company-owned salons (net of buybacks) to franchisees during the year and the government-mandated temporary closure of our salons in third and fourth quarters due to the COVID-19 pandemic.

The decreases were also due to company-owned same-store sale decrease of 4.4%.

The company-owned same-store sales decrease was due to a decrease of 7.7% in same-store guest transactions, which were negatively impacted by the COVID-19 pandemic.

This decrease was partially offset by an increase of 3.3% in average ticket prices.

Company-owned Salon Operating (Loss) Income

During fiscal year 2020, the company-owned salon operations incurred an operating loss of $96.1 million, compared to operating income of $58.3 million in the prior comparable period.

The decrease was primarily due to the $71.9 million reduction in operating income due to the reduction in company-owned salons, the recording of a $40.2 million goodwill impairment charge due to the economic disruption of COVID-19, the closure of company-owned salons due to the COVID-19 pandemic, same-store sales decline and the right of use asset impairment.

These declines were partially offset by an overall decline in general and administrative expense and marketing spend.

Fiscal Year Ended June 30, 2019 Compared with Fiscal Year Ended June 30, 2018

Company-owned Salons Revenues

Company-owned salon revenues decreased $189.0 million in fiscal year 2019, primarily due to the 2019 Net Salon Count Changes and same-store sale s decrease of 0.4% .

The same-store sa les decrease was due to a 4.7% decrease in same-store guest visits, partially offset by a 4.3% increase in average ticket price.

Company-owned Salon Operating Income

Company-owned salon operating income increased $7.8 million during fiscal year 2019, primarily due to the January 2018 SmartStyle portfolio restructure consisting of lease termination and other related closure costs and costs associated with returning the salons to pre-occupancy condition, and field general and administrative savings primarily due to lower headcount.

These increases were partially offset by the 2019 Net Salon Count Changes, state minimum wage increases, rent inflation and marketing investments.

Fiscal Year Ended June 30, 2020 Compared with Fiscal Year Ended June 30, 2019

Corporate Operating Loss (1)

Corporate operating loss of $82.1 million decreased $14.5 million during fiscal year 2020, primarily driven by lower general and administrative salaries and stock compensation benefits associated with a change in performance awards assumptions during the year, partially offset by the prior year's franchise convention cost, which was recorded as Corporate expenses in fiscal year 2020 compared to Franchise expense in fiscal year 2019.

Company-owned salon revenues decreased $273.7 million in fiscal year 2021, primarily due to the closure of a net 613 salons and the sale of 747 company-owned salons (net of buybacks) to franchisees during the year and a decline in sales as a result of lower traffic.

Company-owned Salon Operating Loss

During fiscal year 2021, company-owned salon operating loss decreased $26.1 million to a loss of $70.0 million.

The decrease in the loss was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020, partially offset by an $12.1 million inventory reserve charge recorded in fiscal year 2021.

Fiscal Year Ended June 30, 2021 Compared with Fiscal Year Ended June 30, 2020

Corporate Operating Loss (1)

Corporate operating loss of $96.6 million increased $5.3 million during fiscal year 2019 primarily driven by a prior year gain of $ 8.0 million associated with life insurance proceeds, partially offset by savings realized from Company initiatives, including lowering headcount and lower incentive compensation.

Corporate operating loss of $74.8 million decreased $7.3 million during fiscal year 2021, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person franchise convention in fiscal year 2021.

_______________________________________________________________________________

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Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salons sold to franchisees, and our borrowing agreements are our most significant sources of liquidity.

Additionally, on February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our brands and franhisees.

The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company.

To date we have not issued any shares under the agreement.

As of June 30, 2021, cash and cash equivalents were $19.2 million, with $16.8, $2.0 and $0.4 million within the United States, Canada and Europe, respectively.

The Company has a credit agreement which provides for a $295.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $96.5 million was available as of June 30, 2020.

The Company has a credit agreement which as of June 30, 2021 provided for a $294.4 million five-year unsecured revolving credit facility that expires in March 2023, of which $88.8 million was available as of June 30, 2021.

The credit facility includes a minimum liquidity covenant of not less than $75.0 million.

See additional discussion under Financing Arrangements and Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, capital expenditures, credit facilities and borrowing arrangements and working capital management.

Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1.

Cash Flows (Used In) Provided by Operating Activities

Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes in the Company's business environment.

To the best of our knowledge and based on our current liquidity position and forecast, we believe we have adequate liquidity to run our business and support our growth initiatives.

Cash Flows Used In Operating Activities

During fiscal year 2021, cash used in operating activities was $99.9 million.

Cash used in operations increased year-over-year by $13.5 million due to lower revenues, margins and same-store sales, CEO transition expense of $0.7 million, CEO sign-on bonus of $2.5 million and an increase in lease termination payments of $8.3 million.

The increase in cash use was partially offset by lower salaries due to lower headcount and a decline in general and administrative expense.

During fiscal year 2020, cash used in operating activities was $86.4 million.

Cash from operations declined due to lower revenues and margins and the refunding of the cooperative advertising funds to franchisees as a direct result of the COVID-19 pandemic, as well as lower same-store sales, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2019, cash used in operating activities was $17.5 million, primarily as a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic G&A investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2018, cash provided by operating activities was $2.6 million, primarily due to operating margin, partially offset by the payment of lease termination and other related closure costs associated with the Company's January 2018 SmartStyle portfolio restructures.

During fiscal year 2019, cash used in operating activities was $17.5 million, primarily as a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic general and administrative investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.

Cash Flows from Investing Activities

During fiscal year 2021, cash used in investing activities of $2.1 million was primarily related to capital investments, partially offset by cash proceeds from the sale of salon assets of $8.4 million.

During fiscal year 2020, cash provided by investing activities of $61.0 million was primarily from cash proceeds from sale of salon assets of $91.6 million and the sale of the Company's headquarters of $9.0 million, partially offset by capital expenditures of $37.5 million.

During fiscal year 2019, cash provided by investing activities of $87.8 million was primarily from cash proceeds from sale of salon assets of $94.8 million and proceeds from company-owned life insurance policies of $24.6 million, partially offset by capital expenditures of $31.6 million.

During fiscal year 2018, cash used in investing activities of $1.1 million was primarily from capital expenditures of $30.7 million, partially offset by cash proceeds from company-owned life insurance policies of $18.1 million and cash proceeds from sale of salon assets of $11.6 million.

Cash Flows from Financing Activities

During fiscal year 2020, cash provided by financing activities of $56.2 million was primarily due to the net $87.5 million draw on the Company's line of credit and the repurchase of common stock of $28.2 million.

During fiscal year 2021, cash provided by financing activities of $7.8 million was primarily due to a net $9.4 million draw on the Company's line of credit.

During fiscal year 2020, cash provided by financing activities of $56.2 million was primarily due to the net $87.5 million draw on the Company's line of credit and for the repurchase of common stock of $28.2 million

During fiscal year 2019, cash used in financing activities of $126.7 million was primarily for repurchase of common stock of $152.7 million and employee taxes paid for shares withheld of $2.5 million, partially offset by proceeds from the sale and leaseback of the Company's distribution centers of $28.8 million.

During fiscal year 2018, cash used in financing activities of $62.2 million was primarily for repayments of long-term debt relating to the 5.5% senior term notes of $124.2 million, repurchase of common stock of $24.8 million, employee taxes paid for shares withheld of $2.4 million and settlement of equity awards of $0.8 million, partially offset by borrowings on the revolving credit facility of $90.0 million.

Financing Arrangements

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Revolving credit facility 2023 5.00% 5.50% $ 186,911 $ 177,500

Long-term financing lease liability 2034 3.30% 3.30% 16,773 17,354

Long-term financing lease liability 2034 3.70% 3.70% 11,208 11,556

Long-term financing lease liability 2034 N/A 3.30% — 16,773

Long-term financing lease liability 2034 N/A 3.70% — 11,208

$ 186,911 $ 205,481

As of June 30, 2020 and 2019, the Company had $177.5 and $90 million, respectively, of outstanding borrowings under a $295.0 million revolving credit facility.

As of June 30, 2021 and 2020, the Company had $186.9 and $177.5 million, respectively, of outstanding borrowings under its revolving credit facility.

The five-year revolving credit facility expires in March 2023 and includes a minimum liquidity covenant of not less than $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors, and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property.

Total liquidity per the agreement was $128.9 million as of June 30, 2021.

See Note 8 to the Consolidated Financial Statements.

The revolving credit facility includes a $30.0 million sub-facility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans.

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The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25%, and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

The Company is leasing the properties back for 15 years with the option to renew.

As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability.

This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest.

In fiscal year 2021, the Company determined it would no longer lease the distribution centers for the majority of the assets' useful lives, which resulted in the transactions being considered sale and leaseback transactions.

As a result, the Company derecognized the financing lease liability and the carrying value of the related assets.

See Note 8 to the Consolidated Financial Statements.

Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders' equity at fiscal year-end, was as follows:

As of June 30, Debt to

Capitalization Basis Point

Increase (Decrease)(1)

2020 62.0 % 3,520

2019 26.8 % 1,120

2018 15.6 % (400)

_______________________________________________________________________________

(1) Represents the basis point change in debt to capitalization as compared to prior fiscal year-end.

The basis point increase in the debt to capitalization ratio as of June 30, 2020 compared to June 30, 2019 was primarily due to the increase in the Company's borrowings.

The basis point increase in the debt to capitalization ratio as of June 30, 2019 compared to June 30, 2018 was primarily due to the repurchase of $8.6 million shares of common stock for $152.7 million.

Capitalization

The increase in the debt to capitalization ratio as of June 30, 2021 compared to June 30, 2020 was primarily due to the loss incurred in fiscal year 2021 and the increase in debt.

The increase in the debt to capitalization ratio as of June 30, 2020 compared to June 30, 2019 was primarily due to the increase in the Company's borrowings.

Contractual Obligations and Commercial Commitments

The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2020:

Payments due by period

Contractual Obligations Total Within

1 year 1 - 3 years 3 - 5 years More than

(Dollars in thousands)

On-balance sheet:

Debt obligations $ 177,500 $ — $ 177,500 $ — $ —

Finance lease liabilities (1) 29,235 1,974 4,028 4,136 19,097

Other long-term liabilities 7,014 1,114 1,707 1,329 2,864

Operating lease obligations (1)(2) 933,115 166,635 283,019 224,856 258,605

Total $ 1,146,864 $ 169,723 $ 466,254 $ 230,321 $ 280,566

_______________________________________________________________________________

(1) The total lease liability does not include interest.

Payments due by period are the payments due per the lease agreement and include embedded interest.

Therefore, the total payments do not equal the liability.

(2) Upon adoption of ASC 842 in fiscal year 2020, the operating leases were recorded on the balance sheet so there are no off-balance sheet liabilities.

On-Balance Sheet Obligations

Our debt obligations are primarily composed of our revolving credit facility at June 30, 2021.

Finance lease liabilities are related to sale and leaseback transactions for two distribution centers at June 30, 2020.

Other long-term liabilities of $7.0 million include $4.4 million related to a Non-qualified Deferred Salary Plan and a salary deferral program of $2.6 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

Non-current deferred benefits of $10.0 million includes $5.0 million related to a Non-qualified Deferred Salary Plan and a salary deferral program of $2.5 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

See Note 4 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K

Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the Company by franchisees.

Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner.

The Company has not experienced any material losses as a result from these arrangements;

however, the COVID-19 pandemic may result in an increase in defaults which may be material.

This table excludes short-term liabilities disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year.

We have no unconditional purchase obligations.

Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured.

The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.

The loss of revenue related to the COVID-19 pandemic has increased the risk of default by franchisees, which may be material.

The Company has unfunded deferred compensation contracts covering certain management and executive personnel.

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The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business.

We are a party to a variety of contractual agreements that we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business.

These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their work.

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As such, we are not materially exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

In December 2013, the Board of Directors elected to discontinue declaring regular quarterly dividends.

In December 2013, the Board elected to discontinue declaring regular quarterly dividends.

Share Repurchase Program

In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program with no stated expiration date.

In May 2000, the Board approved a stock repurchase program with no stated expiration date.

Since that time and through June 30, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

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The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions.

During fiscal year 2020, the Company repurchased 1.5 million shares for $26.4 million.

During fiscal year 2021, the Company did not repurchase any shares.

As of June 30, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained outstanding under the approved stock repurchase program.

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We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

As of June 30, 2020 and 2019, the Company-owned reporting unit had $0.0 and $117.8 million of goodwill, respectively, and the Franchise reporting unit had $227.5 and $227.9 million of goodwill, respectively.

As of June 30, 2021 and 2020, the Franchise reporting unit had $229.6 and $227.5 million of goodwill, respectively, and the Company-owned segment had no goodwill at either period.

See Note 5 to the Consolidated Financial Statements.

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If after assessing these qualitative factors, the Company determines it is "more-likely-than-not" that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment assessment is unnecessary.

The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units.

Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percentage of total company expenses.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, corporate-owned and franchise salon counts, proceeds from the sale of company-owned salons to franchisees and long-term growth rates for determining terminal value.

The carrying value of the reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units.

Allocations are generally based on the number of salons in each reporting unit as a percent of total salons or expenses of the reporting unit as a percentage of total company expenses.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, fixed expense rates, allocated corporate overhead, franchise salon counts, and long-term growth rates for determining terminal value.

Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows.

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Long-Lived Assets, Excluding Goodwill

The Company assesses impairment of long-lived salon and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets.

The first step is to assess recoverability and in doing that the undiscounted cash flows are compared to the carrying value.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value.

The fair value of the salon long-lived asset group are estimated using a market participant model based on the best information available, including salon level revenues and expenses.

The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2020.

The impairment is allocated to long-lived assets based on relative carrying value, but not impaired below fair value.

Long-lived property and equipment asset impairment charges related to continuing operations of $3.9, $4.6 and $11.1 million were recorded during fiscal years 2020, 2019 and 2018, respectively in Depreciation and Amortization in the Consolidated Statement of Operations.

A long-lived asset, including right of use and salon property and equipment, impairment charge of $22.6 million was recorded during fiscal year 2020 and is separately stated on Consolidated Statement of Operations.

Of the total $22.6 million long-lived asset impairment charge, $17.4 million was allocated to the right of use asset and $5.2 million was allocated to salon property and equipment.

Judgments made by management related to the expected useful lives of salon long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors, such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

Right of use asset values are impacted by market rent rates.

As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.

A lessee's Right of Use (ROU) asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment.

The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

Poor salon performance in fiscal years 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment.

Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors.

The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.

Step two of the long-lived asset impairment test requires the fair value of the asset group be estimated when determining the amount of any impairment loss.

For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value.

The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group.

To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include;

the market rent of comparable properties, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate.

The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include:

the market rent of comparable properties, the asset group's projected sales, and a discount rate.

In fiscal year 2020, the Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.

For fiscal year 2021, the Company recognized a long-lived impairment charge of $13.0 million, which included $9.5 million related to ROU assets on the Consolidated Statement of Operations.

The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts.

Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups.

Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment that can be affected by economic conditions and other factors that can be difficult to predict.

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore, if actual results are inconsistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns.

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Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:

• The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.

Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:

• In connection with the Coronavirus Aid, Relief and Economic Security Act (CARES Act), Net Operating Losses (NOLs) resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis